Getty Accounting Problems

EyeWire contributors recently began receiving huge windfall royalty payments fromGetty Images -- up to 20 times their normal average monthly payments -- as a resultof an internal audit by Getty.

EyeWire had developed a line of Royalty Free products with images supplied byphotographers and stock agencies. This company was sold to Getty Images in August,1999. It appears that the royalties of all the EyeWire suppliers were affected. Alsosold on the EyeWire site were images of other Royalty Free brands such as DigitalVision, Rubberball, Hollingsworth Studios, Artville, Birch Design Studios, Cartesia,Image Club, etc. and there is evidence that at least some of the royalties owed thesecompanies had not been paid as well.

Given the size of the payments the accounting errors may go back to when Getty firstpurchased EyeWire. Some of the individuals and organizations have not supplied newimages to the EyeWire product line for several years. There is no evidence that anyof this had anything to do with EyeWire's original management of the brand. Allindications are that it is solely a problem with Getty's tracking and accountingsystems. One supplier was told that the problem occurred at "one of our callcenters."

Getty should be given credit for making these payments for back royalties owed assoon as the error was discovered. Sources at Getty claim that the audit of EyeWirerecords is now complete and say that all problems have been discovered and thesuppliers notified of what they are owed. These same Getty sources also indicatedthat all monies due had been paid in May, but some of the suppliers we checked withhave received notice of what they are owed, but no money as of early July.

Getty has refused to explain to Selling Stock how such discrepancies could haveoccurred arguing that this would be "selective disclosure" which is prohibited by theSEC. Getty also claims that I (Jim Pickerell) have a conflict-of-interest inquestioning them about accounting irregularities as I am currently an expert witnessin the case of Penny Gentieu vs. Getty Images which deals with an alleged series oftotally unrelated accounting irregularities.

What Caused The Problem

In letters to contributors Getty has tried to claim that the problems stem from theintegration of sales data from their old legacy accounting systems into their newOracle based "Alliant" accounting software. Getty has been integrating data fromapproximately 20 different systems into Alliant, the EyeWire system being only one ofthem.

Getty first started uploading data to the Alliant system in the summer of 2001 andhas been having major problems with royalty payments ever since. We first reported onproblems with the VCG brands in December 2001 (See story 446 ).

When Getty acquired EyeWire in August 1999, they did an immediate data dump of allthe images onto the Gettyone.com site. It appears the foreign distributors were alsotold to start paying the royalties directly to Getty. Getty also continued to operatethe EyeWire.com site in Calgary, Canada. Thus, essentially, there were three sourcesof revenue from the EyeWire images -- the EyeWire.com site, the Gettyone.com site andforeign distributors.

The EyeWire.com site was physically located in Calgary until November 2001, andcontinued to be operated, for the most part, by the people who had founded and builtEyeWire. Royalties generated by sales from this site continued to be paid tocontributors by the Calgary operation, just as had been the case before Getty tookover.

Getty has acknowledged in letters to contributors that the sales where royaltypayments were not passed through to rights holders in a timely manner were made onGettyone and by the foreign distributors. These were under the control of Getty'saccounting operation in Seattle.

In November 2001 the Calgray operation was closed down and all digital files and datawere transferred to Seattle. At that point the Calgary accounting records wereuploaded into Getty's new Alliant system.

Spotting The Problem

Contributors have been saying for some time that their Eyewire sales were fallingoff. Many concluded that this drop resulted from a combination of a reduction inadvertising, the heavy discounting of images sold through GettyWorks, and the use ofa subscription sales strategy.

Getty stopped aggressively promoting the EyeWire.com site after they took over. Theirgoal at that time seemed to have been to move all future sales to the Gettyone site,and the new Gettyworks brand they created. The exact dates of these moves areunclear, but this was the general trend of what they were doing.

Given the above explanations for why sales were falling, and since they were stillreceiving regular monthly reports and checks, contributors assumed they were beingpaid everything they were owed.

Dimensions of the Problem

Getty has been unwilling to explain how this problem developed, or how widespread itis. All they will say is that it involves a "small" number of contributors and a"small" amount of money. Small is a relative term. Because of the way EyeWire, a RFcompany operated, the number of contributors may be small, but each one hadsignificant numbers of images involved. Millions of dollars could be consideredsmall, if we compare it to Getty's total revenue of $451 million in 2001.

I estimate that the total monthly royalties EyeWire should have been paying to allcontributors should have been in the range of $150,000 to $200,000. Since some ofthose who are receiving payments are getting about 20 times their average monthlyroyalty the total of the back royalties owed could be between $3 and $4 million, ifall rights holders were proportionally affected. On the other hand we have found atleast one rights holder who was only owed a small amount of money. It is unclear whatkind of systems error could have affected the sales of some rights holders in a majorway and others very minimally.

At first, sources at Getty tried to claim that all the problems arose as a result ofthe integration into the Alliant system, and thus they would have begun afterNovember 2001. If this were the case, and given the size of some of the payments,Getty's total EyeWire sales would have had to jump 200% to 300% in the last eightmonths and we believe this was not the case.

Given that EyeWire contributors were receiving some royalties all along, the sourceof the missing revenue must go back at least a year-and-a-half, if not much further.This means that the problem had to be in Getty's original accounting methods longbefore the Alliant system was introduced.

It is unclear how such a large amount of royalties could be overlooked for so long atime. In the accrual accounting system whenever cash, or any kind of payment, isreceived and credited as revenue a debit must also be automatically entered toreflect a "cost of sales". That "cost of sales" should be automatically credited tothe photographer's account. For some reason it appears this didn't happen in a hugenumber of individual sales. In countless talks with photographers people from Gettyhave insisted that this kind of thing couldn't happen - that the photographer'saccount would always be credited the instant a sale was booked, or any money wascollected.

The other possible explanation is that somehow this money was never recognized asrevenue. This is not suppose to happen either. And given that Getty is always lookingfor every possible way to show that revenue is increasing, it is hard to imagine thatthey would have money in the bank that they were not reporting. Not to mention thatthis would be illegal.

We suspect that some of these payments were made by credit card because many of theEyeWire sales are for small amounts of money and to small users. It is not easy toexplain how credit card sales could be made and not claimed as revenue.

While the indications to date are that this problem is only with the EyeWire brand,we don't know enough to determine whether there has been some fundamental flaw in their accounting system that will lead to the samekind of errors showing up in the other brands once they are audited.

EyeWire contributors were asked in letters from Getty to, "please accept ourassurance that these problems are not expected to recur." Such problems were notexpected to happen in the first place and without some explanation as to what reallyhappened the "assurance" is not very comforting.

Why It Was Discovered Now

The accounting department has been fully occupied in dealing with the Alliantintegration problems for almost a year. Their first concern was to get current on allroyalty payments and that has taken almost a year. Until recently they had littletime to go back and audit their systems. According to Roger Ressmeyer, "Auditing isaccelerating now that royalty statements are back on schedule. Getty is committed toauditing all the brands and hopes to have the work finished by mid-August." At worstthey expect it could take three or four months to do a total audit of the system.

Good News

One element of good news for the EyeWire contributors is that it now appears thatsales for their products -- many of them created three or more years ago -- are stillstrong and have not been falling off as they had feared.

Also Getty has indicated that they are now listening carefully to photographers whospot things on their sales reports that they think might be a inaccurate. They aretaking detailed comments and investigating each allegation. Ressmeyer said, "When thephotographers provide us with the details we investigate and fix any problems wefind. We are committed to correcting and straightening things out the instant webecome aware of the problem." Photographers who have felt that their complaintsweren't listened to in the past may find Getty more responsive now.

Jim Pickerell is founder of www.selling-stock.com, an online newsletter that publishes daily. He is also available for personal telephone consultations on pricing and other matters related to stock photography. He occasionally acts as an expert witness on matters related to stock photography. For his current curriculum vitae go to: http://www.jimpickerell.com/Curriculum-Vitae.aspx.

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